SEOUL — Japan’s cabinet decided to remove South Korea from a list of trusted trading partners Friday, turning up the heat in a bitter dispute between the two U.S. allies about compensation for wartime forced labor.

The spat is already causing economic pain, from South Korea’s electronics industry to Japanese consumer goods, and threatens to harm security cooperation between the United States’ key strategic partners in the region.

Growing nationalist outrage on both sides of the Korea Strait is trapping both governments in a cycle of tit-for-tat escalation from which there is no easy escape, experts say.

South Korean President Moon Jae-in called Japan’s move a reckless, selfish and destructive act that reopened “old wounds,” and he vowed to respond. “If Japan intentionally strikes at our economy, Japan itself will also have to bear significant damage,” he said in a statement.

Friday’s decision, which will take effect Aug. 28, could tie up Japanese exporters of goods with potential military uses to South Korea in additional layers of bureaucracy and official approval, delaying shipments and raising costs. It is also a symbolic blow at the status of a major trading partner.

A screen at a Seoul station shows Japanese Prime Minister Shinzo Abe on a TV news program Friday. A rancorous dispute between the two neighbors over historical grievances is escalating. (Ahn Young-Joon/AP)

South Korea responded with an equivalent step. It has also threatened to cancel military intelligence-sharing with Japan, a move experts say would undermine U.S. security interests.

On Thursday, Secretary of State Mike Pompeo said he hoped the two countries would find a solution, stressing cooperation on North Korea was “incredibly important.”

In South Korea, though, a popular boycott of Japanese goods has affected everything from beer and cigarettes to clothes and cars, fueled by deep-seated rivalry and mistrust between the neighbors.

Supermarkets are refusing to stock Japanese products. Shoppers are staying away from the popular Japanese Uniqlo clothing chain, garages are refusing to repair Japanese cars and tourists are canceling plans to go to Japan on vacation. High schools have even joined in the protests.

“I wasn’t part of the independence movement but I can join the boycott movement,” a poster issued by a union of parcel-delivery workers reads, referring to the independence struggle against Japanese occupation. Indeed, much of the rhetoric roots the dispute squarely in Korean feelings of hurt and humiliation at Japan’s past colonial rule, and in what Koreans see as Tokyo’s lack of remorse.

South Korean police officers gather outside the Japanese embassy in Seoul on Friday, where protesters voiced anger at Tokyo. (Ahn Young-Joon/AP)

The union is telling its members not to deliver Uniqlo parcels, and says more than 90 percent of its 2,500 members have agreed to participate in the boycott.

Sales of Japanese beer fell 30 percent in the first half of July, according to supermarket chain E-mart, while sales of flights to Japan and tour packages are reported to have fallen by similar margins.

The dispute began with consecutive South Korean Supreme Court rulings last year ordering Japanese companies to pay compensation for victims of forced labor during Japan’s occupation of Korea from 1910 to 1945.

The judgments infuriated Japan’s government, which gave South Korea an economic aid package as final compensation and settlement of historical grievances when the countries restored diplomatic relations in 1965.

Moon has also ripped up a 2015 bilateral agreement establishing a fund for South Korean “comfort women,” who were forced into brothels serving the Japanese military during World War II, even though that agreement was billed as the “final and irrevocable settlement” of the issue. Japan fears the wartime forced-labor issue will affect many Japanese firms operating in South Korea. Courts have ordered the seizure of Japanese assets as compensation, and similar rulings are expected in more than a dozen other cases potentially affecting scores of companies. That could dramatically undermine Japanese trade and investment in South Korea.

Tokyo is frustrated at the way successive South Korean governments have exploited tensions with Japan to drum up support and have failed to honor agreements signed by their predecessors. It says South Korea has refused to nominate an arbitrator to settle the dispute over forced labor, ignoring the process established in the 1965 treaty.

Foreign Ministry spokesman Takeshi Osuga said there was no room for Prime Minister Shinzo Abe to back down given “prevailing domestic anger” and the legal principle embodied in the 1965 treaty, even if it resulted in economic pain.

“Legal issues related to wartime labor history cannot be sacrificed for small commercial interests,” he said.

Tokyo’s response has been to strike at South Korea’s status as a trusted trading partner, first imposing export controls on three chemicals vital for South Korea’s world-leading semiconductor industry and now removing the country from a “white list” of 27 countries that are trusted to import goods that might have military uses without jumping through bureaucratic hurdles.

Tokyo says it took the trade measures on national security grounds because of lax South Korean export controls. It says its actions were not a direct response to the wartime-labor spat but acknowledges that declining trust between the nations was a factor.

That admission has caused some experts to accuse Tokyo of using trade as a political weapon, in a way that undermines its professed commitment to free trade.

The two countries’ foreign ministers failed to narrow their differences at a Thursday meeting in Bangkok. Asked afterward whether Japan’s moves could cause Seoul to cancel the military intelligence-sharing agreement, Foreign Minister Kang Kyung-wha said they “could affect the framework of security cooperation with Japan.”

Memories of Japanese occupation remain alive in South Korea and are reinforced through the education system and political rhetoric. In a speech marking the 100th anniversary of the independence movement, Moon said the country still needed to wipe out “the vestiges of pro-Japanese collaborators.”

The dispute has flared just as young people from both countries had begun to bury their animosity. Millions of South Koreans travel to Japan each year, and mutual admiration for the other’s popular culture — from Japanese anime and food to Korean pop music and drama — is widespread.

Min Joo Kim in Seoul and Akiko Kashiwagi in Tokyo contributed to this report.